The Bank of Japan (BOJ) stopped its negative interest rate regime, the last of its kind in the world. The policy was put in place to encourage banks to lend money, boost demand, and increase inflation. The program has come to its conclusion, as strong wage increases suggest that the BOJ’s inflation target is within reach. The impact of this policy shift will vary across different parts of the economy and financial markets, benefiting some while presenting challenges for others.
A former board member of the BOJ, Makoto Sakurai, previously stated in an interview that the BOJ is fully prepared to end the negative interest rate, with April being the most likely time for this change. He mentioned that the BOJ is waiting for one or two pieces of economic data before making the final decision.
Observers are monitoring whether recent political scandals in Japan will affect the timing of the end of the negative interest rate. Sakurai believes this could accelerate the process, as certain political factions supporting aggressive monetary easing have weakened.
Negative Interest Rate
A negative interest rate means that instead of receiving interest on money, you deposit it in banks and pay interest. Central banks in Europe introduced this new approach in the 2010s to fight against falling prices. The Bank of Japan adopted negative interest rates in 2016 as part of its efforts to combat deflation or declining prices.
The BOJ’s negative rate program applied to only a small portion of deposits that private banks keep at the BOJ, not the retail deposits.
The aim was to encourage banks to use their funds for lending. This program was added to the BOJ’s aggressive buying of financial assets to increase the amount of money in the economy.
How Effective was the Negative Interest Rate
Globally, opinions about the effectiveness of negative interest rates are mixed. In Japan, they might have helped, along with BOJ’s asset buying, to prevent deeper deflation in the economy.
Its prolonged use affected banks’ profitability and contributed to a decline in the value of the yen, making Japan’s currency less attractive as other central banks raised interest rates.
However, it took supply shocks during the COVID-19 pandemic and the consequences of Russia’s war in Ukraine to cause a sharp increase in the costs of imported energy, materials, and food, pushing the nation’s inflation above the central bank in the world to maintain a negative rate policy.
The weaker yen further increased the costs of imports, affecting consumers whose wages did not keep up with rising living expenses.
The decision to end the negative interest rate marks the beginning of the reversal of monetary stimulus measures aimed at achieving sustained economic growth. For years, falling prices trapped the economy in a downward spiral, and companies cut costs, even at the expense of their profits, to stay competitive.
Japanese companies agree to significant wage hikes, which are expected to boost consumer spending. This move is seen as the first step in unwinding monetary stimulus measures aimed at achieving self-sustaining economic growth.
The end of the negative interest rate will have various implications for different sectors of the economy. While the government and the BOJ may face increased debt servicing costs and private rises, potentially cooling the real estate market, a stronger yen could lower import costs and benefit households by reducing the prices of imported food and energy while it may harm impact exporters’ competitiveness and over sea earnings.
After this BOJ’s end of negative interest rate, the focus will shift to how high the policy rate will rise. However, the BOJ governor Kazuo Ueda has indicated that its overall monetary policy will remain accommodative for the foreseeable future, considering the ongoing weakness in consumption.